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Comment by tlb | Hacker News Reader

The regulations that allow a bank to hold long-term fixed-rate bonds backing variable-rate liabilities (since deposit rates float) seems broken.

It's straightforward to reckon their exposure to interest rates: they had $90B in 10-year fixed rate bonds, so they lose $9 billion per % of interest increase. They must have known that a 4% increase in interest rates would put them underwater, but they did it (and were allowed to do it) anyway. It'll be interesting to learn about the process behind that decision.

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What’s crazy to me is the fed hasn’t been raising rates out of the blue. What the fuck was this bank doing the last two years during every raise? They should have been rebalancing.

I think what probably happened is that, for whatever reason (hubris, incompetence, some bull thesis) they didn’t sell their HTM assets during interest rate increases until it got to a point that taking a loss on them would have forced them to recalculate their reserves such that they were lower than deposits (ie insolvent). Technically they were allowed to do this because they get to count the maturity price as reserves rather than the market price. Selling at a loss at any point would have fixed the problem but force them to lower their reserve calculations and realize a loss.

Once their HTM assets’ market price fell enough that rebalancing would force them to admit to insolvency by recomputing their reserves, they literally could not do anything with them except hold and pray that they make it, which may have just made things worse. Who knows how long they’d really been underwater

> They should have been rebalancing.

How would that have helped?

Say they have 90B deposits and 100B in long term treasuries

Once that 100B falls to 95B due to interest rate hikes they could sell them all and buy 95B of short term treasuries instead, insulating them from any further rate hikes

They would sell 95B of 10-year MBSs, but ho would buy them?

Other banks will buy them at the right price (ie. less than what SVB paid initially).

How is that different from just buying short term treasuries, instead of long term, in the first place?

If rates don't go up then you get better yield with long term treasuries

I'm wondering the same thing. The current rise in interest rates must have been a scenario that the bank considered. How can we still have a system that allows situations like this to happen? Other than negligence or malpractice, I cannot fathom a reasonable explanation as to how this happened / was allowed to happen (again).

this is the system working as designed

zero risk is not a thing

There's nothing wrong with your first sentence really. Banks can (and should) hedge these risks using swaps and other products. Someone really messed up here.

All banks run on exchanging short term liabilities for long-term assets. No bank is big enough that it can survive a large enough run.

The whole point of capitalization stress-tests is to determine that banks can withstand a certain amount of withdrawals.

It of course is going to be much much more likely on a bank that only has 3% FDIC - I have no desire to "run" on my bank because I am below the $250k limit, and even if the accounts were frozen for a week it wouldn't be that worrisome.

But if I were a startup with $100m at SVP, I would have been freaking out earlier this week.

It is absolutely ridiculous for someone with more than a few million sitting in checking to, well, have it sitting in checking.

Not only is there the 250k FDIC limit, but that's leaving money on the table. At least put it in highly liquid and stable securities of some kind so you're not bleeding it. And, of course, accounts can get locked out. Anything over a couple million should be split across two different institutions minimum.

> It is absolutely ridiculous for someone with more than a few million sitting in checking to, well, have it sitting in checking.

Suppose you have 500 engineers each making on average $200k (some make above, same make below). That is about about 17000 / month or 8500 biweekly. It takes time to transfer money. What options do you have for storing the money that is immediately payable. Stocks are volatile. Treasury bills or bonds could work, but it would be a good idea to have it such that the money is deposited a day or two early so you can make pay roll.

500 * 8500 = 4.25 million, so even a medium-size startup simply using SVB for their payroll checking (due today, so they should have had it in by yesterday, and recall ACH processing times of 2-3 days) could easily have a few million sitting in a checking account as part of weekly practice.

In the US, it takes 24 business hours to transfer money, sometimes less. Payroll is easy as you know the exact amount and it's on a precise schedule set months in advance.

Additionally, there is at least one person at the company whose full-time job is to handle this. Making a transfer every Tuesday or Wednesday or whatever is well within a workload. When I say "sitting in checking" I quite obviously mean more than two weeks by "sitting".

Also, I was mostly referring to series-A startups that have, for example, single digit millions in the bank. Keeping that all in checking is dumb. Larger companies that are moving millions each week can afford to have special arrangements with their bank or banks to limit liability independent of FDIC. A line of credit, perhaps, that is paid off a week or three later, secured by a bundle of securities held at the same institution, for example. I'm fairly sure a bank run can't touch those.

There are so many possible solutions to this problem.

Maybe it's because I've been burned hard by banks before, but I'll never trust them to not do precisely what SVB did here (in some fashion). Everything's great until it isn't.

EDIT: Engineers making $200k isn't $200k in cash comp, either, FYI. (And anyone with 500 of them has more than one bank account already.)

> In the US, it takes 24 business hours to transfer money, sometimes less.

What? The third-world banking system of the US often takes MUCH longer than that.

No. Checks clear in 24 business hours, and fedwire wire transfers work same day if they are submitted early enough, and in no case more than 24 business hours (for domestic wires). Oftentimes domestic fedwire transfers are nearly real-time, and there is a plan for further modernization to speed things up in more cases.

ACH transfers are also 24 business hours.

The check clearing thing is called Check 21 and it was a big thing back in 2004 when it went into effect.

https://www.federalreserve.gov/paymentsystems/regcc-faq-chec...

A swap has two sides. Someone still holds the bag, so what you're saying here doesn't make sense. What SVB was doing is typical; regular banks don't hedge anything. You can see everything in a Bloomberg terminal

they don't lose anything if they're not forced to liquidate those bonds but can hold them to maturity. It seems like the real problem here is a lack of diversity in liabilities (all tech/biotech startups).

That's not true. When interest rates go up, they have to pay the higher rates on customer deposits, but they're not getting any more from their bonds. Perhaps they can spread the losses over 10 years, but the losses are the same.

I don't think they "have" to pay the higher interest. Wouldn't they ultimately get that interest from parking money at the Fed over night? A bank isn't going to pay interest on money that results in a net loss, either they get it from the Fed or they are making private loans at a higher rate. Otherwise there would be no incentive to increase deposits as each would result in lost profits.

A bank either pays competitive deposit interest rates, or people move their deposits elsewhere. That can happen quite quickly, and they'd have the same liquidity problem.

Right because interest rates only go up, right?

Obviously they go down too, but for a bank to be doomed if they go either of the two possible directions is bad.

They don't have to and have not been paying higher interest rates on deposits.

One concern is that depositors will realize they can get better returns on money market funds and withdraw from banks en masse.

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